Does Health Care Reform Include a Real Estate Tax?

Health care reform ain’t pretty and it ain’t cheap. (Of course, neither was America’s health care system before the passage of the Patient Protection and Affordable Care Act, but that’s not the point). Someone has to pay for the new law and there’s a host of fees, taxes and the like to foot the bill.

In a comment on my previous post, Jim Diani asked about a 3.8% tax on real estate sales the PPACA imposes starting in 2013. Since the answer concerns more than real estate transactions and hasn’t been discussed much here, I thought a post would be helpful.

There is no tax in the new health care reform aimed specifically at real estate transactions, yet there is a tax that will apply to many such sales. Specifically, the PPACA imposes an “Unearned Income Medicare Contribution tax of 3.8% imposed on the lesser of income over $200,000 for individuals (and $250,000 for joint filers) or on investment income.  This tax was contained in the reconciliation bill, HR 4872 (page 33 for those keeping track). Investment income , and more precisely, “net investment income,” is defined as the sum of “gross income from interest, dividends, annuities, royalties, and rents” not earned in the ordinary course of a trade or business and “net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property,” but not property held in a trade or business.

(This seems like an appropriate point to mention that those seeking a formal interpretation of this provision of the PPACA should consult with your tax expert and that nothing in this post is intended to be or should be taken as tax or financial advice. While we’re at it: clean your room; don’t mix reds and whites in the laundry; if you’re a broker join NAHU;  and don’t text while driving. Now back to our regularly scheduled post.)

So how does this play out. For an individual earning a salary of $300,000 per year who sells her home for $800,000 which, after offsetting basis and various homeowner deductions nets her a profit of $250,000 on the sale, the tax would apply to the $100,000 in salary above the $200,000 threshold (for an additional tax of $3,800) and nothing on the $250,000 unearned income netted from the sale of the property. Change her salary to $500,000 and, since the tax applies to the lesser of wages above the threshold or unearned income, she’d pay an additional $9,500 of taxes on the sale of the house. (Note 11/11/10: This example has changed from the original posting thanks to an error pointed out by reader Don H . Thanks Don for this catch and to Janet Paiwelson for noting the typo on the Medicare Part A tax, below — which has also been correct. I apreciate the help from both of you).

Whether the tax applies to the sale of a home, then, depends on several factors. Clearly the tax is not applied on the total sales price (in the example above, the $800,000). Many taxpayers realize little income from home sales thanks to the tax-favored nature of this particular investment.  But to the extent there is some taxable income realized from the sale of a home under today’s tax code, the PPACA does apply a 3.8% on this investment income to help fund Medicare.

And to be clear, the tax isn’t targeted at home sales. It applies to a broad range of unearned income.

Ask supporters why they imposed this tax and the most common answer will be that it’s a matter of fiscal responsibility (President Barack Obama insisted that the new health care reform law be deficit neutral) and as a matter of tax equity. This latter point goes to the current situation in which only salaries and wages are subject to the Medicare tax. There’s a whole group of Americans who earn hundreds of thousands of dollars on investments, dividends and the like who avoid this tax yet benefit from Medicare. Imposing this tax on non-wage income is viewed as a way of making the tax system more fair.

Incidentally, this isn’t the only new Medicare tax. Individuals making at least $200,000 a year or married couples earning $250,000 will see their Medicare Part A taxes increased by 0.9%. Taken together, this increase and the Unearned Income Medicare Contribution are expected to generate $210 billion between 2013 and 2019.

The new Congress may try to eliminate or postpone these taxes, but my guess is they’ll have a tough time doing so. First, because politically it’ll be hard for Republicans to constantly be seeking tax relief for high wage earners and those living on investments. Second, the expected revenue from these taxes amounts to over 20% of the cost of health care reform. Reducing or eliminating this revenue would gut the PPACA and President Obama won’t agree to that.

Meanwhile, back at the original question: does the new health care reform impose a 3.8% tax on the sale of homes? Only to the extent any portion of the sales price would be considered taxable income today and that income (when combined with other investment income) exceeds the taxpayers wages above $200,000 for an individual and $250,000 for a couple.

Thanks for the question, Jim. Hope this helps.

26 thoughts on “Does Health Care Reform Include a Real Estate Tax?

  1. I agree with what Arlene said, both real estate and health care does not have anything in common! So why connect the two. There is really a scam behind this and before any further steps are taken, it should be investigated first and the result shown to the public.

    • Randall and Arlene: The tax is not aimed at real estate, it’s aimed at investment income. The idea is to treat unearned income the same as wages. Some people receive unearned income from real estate, so the tax applies to those transactions. But Congress was not “linking” real estate and health care” any differently more than current law links salaries and health care. Hope this puts things in perspective.

  2. Why does Real Estate have Anything to do with Health Care????this is a scam to the American people!
    Every American should know this and with the new House (Republican’s ) coming in I think they can Stop this right in its tracks!
    Thanks,
    Arlene
    and the sooner Nancy Pelosi leaves the Better:)

  3. The task of weaning various people and groups from the national nipple will not be easy. The sound of whines, bawls, screams and invective will fill the air as the agony of withdrawal pangs finds voice.

    –Linda Bowles

    I am confused.

    Some very significant portion of the national healthcare spending is devoted to people in the last six weeks of life.

    The vast majority of people in the last six weeks of life are quite old.

    The Tea Party, which is largely (though not exclusively) made up of older white conservative males, advocates drastic federal spending cuts to reduce the deficit.

    But they largely (though again not exclusively) do not want to pay a penny for their Hoverounds, their Provenge (the controversial prostate cancer vaccine that extends life on average by four months at a cost of $90,000 plus), or any of the other Medicare and/or Social Security perks they feel absolutely entitled to for a laundry list of reasons (I contributed thus I deserve it; or, I didn’t contribute, but I spend a lot of money, thus I deserve it; or I was a child during World War II and part of the Greatest Generation, more or less, so I deserve it; or I got to church and believe in the Free Market and other parts of the conservative code, thus I deserve it.)

    I understand that many here are conservative Republicans, and that it’s fine to speak about the failings of Nancy Pelois, Obamacare, etc.

    But at least acknowledge on some level that there is a little bit of mixed messages going on.

    Reduce the deficit? If that’s the most important thing, at least be consistent. Don’t shout this blanket statement out while whispering, “But not that part of the deficit that directly benefits me and my tribe. Hands off that part! Reduce the deficit at the expense of ‘those people’ who don’t deserve it.”

    • James you seem to be tuned into a station only you can hear. You’ve certainly done an excellent job of bolstering your commentary with statistics that I’m absolutely certain you couldn’t prove (You seem to really have it in for the Tea Party) but I think you have a point to prove about Health Reform and – by gosh – you’re determined to make it. Unfortunately I’m not quite clear why you continue to try and make it on the backs of the elderly.

      Hey James here’s a news flash for you: Not everyone wants to squeeze out the last morsel of life on this planet. What your commentary failed to take into account is that there are some of us who would like to see ‘die with dignity’ put into place to offset the government’s intrusion into an individual’s ability to call it a day when they felt it was time to leave this earth. (And I’m not talking about withholding certain things at the very end when the person has already been through hell on earth)

      Seems to me your problem should be – once again – with legislators AND with the health care industry. The situation you’re describing is happening on their watch. You are a great example of the argument that says the problem begins and ends with the health insurance industry – while conveniently obscuring the fact that health insurance is held hostage by what is happening in the health care industry. Hey James: Enjoy your Health Exchange and please brace yourself because you are going to be one unhappy guy when you find out it will do absolutely ZILCH to stem the tide of rising insurance premiums in this country.

      I really have to chuckle when I see the same old arguments being trotted out when it comes to this country’s exploding deficit: ‘Oh you don’t want us to reduce spending because then you’ll be adversely affected and that would make YOU a hypocrite…’ That argument is so tired. If you’ll refer back to the link provided below on the commission that studied the deficit and what we need to do AS A COUNTRY – the bottom line is always the same: Sacrifices need to be made across the board by one and all. The whole deficit ‘issue’ is like an armed conflict – ‘you stop shooting first…no you stop shooting first!’ Hey, you know what? Somebody is going to have to stop first.

      So – to sum up – at least from my camp, James: No mixed messages here – the deficit this country is running cannot be sustained. In the past two years we have given new meaning to deficit spending. I thought my “tribe” was being an American: I voted for Obama and have watched in horror as this guy and his posse have spent us into a death spiral. Don’t automatically assume that my opposition to a president who makes me nostalgic for the relatively benign screw ups of Jimmy Carter makes me a conservative republican. Nope – it just makes me a guy who hates ineptitude in a President and a House majority.

      • I have ZERO problem with anything Seniors get through Medicare – in a day and age when just about every single state and local government is slashing senior centers, senior day care, senior benefits of all kinds out of their budgets, it’s these folks (and lots of kids) who are taking it right in the neck.

        –Curt Cella

        …what we need to do AS A COUNTRY – the bottom line is always the same: Sacrifices need to be made across the board by one and all.

        –Curt Cella

        • Hey James –
          What’s your point? I’d say the elderly have already been paying for our country’s poor economy. Isn’t it time that the rest of us chip in? If you want to have an intelligent conversation make your points and let’s discuss – if you just want to do a clip and paste job then move on…

          Good grief You really have a bug up your butt when it comes to the elderly and the Tea Party. I think you gave your age as 58? If you think the elderly and Medicare recipients in this country have it so great then just make yourself feel better by going to your nearest mirror and keep repeating: 7 more tears…7 more years….7 more years….

          Keep repeating and pretty soon it’ll be 6 more years….6 more years….6 more years….6 more years….

          and so forth….Pretty soon you too will get a Medigap plan and you can start feeling great about life again.

          Perhaps in my desire for brevity I didn’t quite explain myself as well as I should have: When we start talking about budget cuts I certainly don’t think we need to do that on the backs of seniors or children. And by children I am also referring to what is going on out here in California where college fees are being raised on an almost daily basis putting education further and further out of reach….There are MANY great ways to cut a budget – these include abolishing a year round legislative body here in CA – 3 months and then go back to your JOB back in your district ought to do just fine.

          Put our space program on hold. Reduce foreign aid. Line item veto at federal level. Seriously consider either waging war to a full and final conclusion in Afghanistan or get the &#%#^ out! Start getting serious about reducing the rising tide of illegal immigration where wages are going out but taxes aren’t coming back in.

          I could go on but why bother James – you already are so focused on how the elderly in this country are siphoning off money from society that I’m not sure you’re able to focus on anything else.

          Great movie for you: Logan’s Run. Enjoy your weekend (and hug a senior).

        • Curt, here is the current US budget, more or less.

          As an intellectual exercise I nominate you to be in charge of balancing the budget (and cutting taxes more, if you want to) as opposed to all those “idiot legislators” who are against the “American people.”

          Go ahead a whack away. Just please, I ask you, be a little bit specific.

          Not a lot, just a little.

          Don’t say, “WE NEED TO CUT SPENDING AND EVERYONE NEEDS TO SACRIFICE.”

          Say, we need to trim X, Y, and Z (or however many letters you want to site) and then specify by how much. You can get rid of mandatory spending items as you see fit, too; do not feel obligated to limit yourself to discretionary items only.

          When you are done, make sure that you have also covered the wars in Iraq and Afghanistan, too, which are currently appropriations not included in the federal budget.

          Oh, and make sure that seniors get everything they are currently getting, with cost of living raises factored in.

          Thanks!

          Mandatory spending: $1.89 trillion (+6.2%)
          $644 billion – Social Security
          $408 billion – Medicare
          $224 billion – Medicaid and the State Children’s Health Insurance Program (SCHIP)
          $360 billion – Unemployment/Welfare/Other mandatory spending
          $260 billion – Interest on National Debt
          Discretionary spending: $1.21 trillion (+4.9%)
          $515.4 billion – United States Department of Defense
          $145.2 billion(2008*) – Global War on Terror
          $70.4 billion – United States Department of Health and Human Services
          $68.2 billion – United States Department of Transportation
          $45.4 billion – United States Department of Education
          $44.8 billion – United States Department of Veterans Affairs
          $38.5 billion – United States Department of Housing and Urban Development
          $38.3 billion – State and Other International Programs
          $37.6 billion – United States Department of Homeland Security
          $25.0 billion – United States Department of Energy
          $20.8 billion – United States Department of Agriculture
          $20.3 billion – United States Department of Justice
          $17.6 billion – National Aeronautics and Space Administration
          $12.5 billion – United States Department of the Treasury
          $10.6 billion – United States Department of the Interior
          $10.5 billion – United States Department of Labor
          $8.4 billion – Social Security Administration
          $7.1 billion – United States Environmental Protection Agency
          $6.9 billion – National Science Foundation
          $6.3 billion – Judicial branch (United States federal courts)
          $4.7 billion – Legislative branch (United States Congress)
          $4.7 billion – United States Army Corps of Engineers
          $0.4 billion – Executive Office of the President
          $0.7 billion – Small Business Administration
          $7.2 billion – Other agencies
          $39.0 billion(2008*) – Other Off-budget Discretionary Spending
          The financial cost of the Iraq War and the War in Afghanistan are not part of the defense budget; they are appropriations.

          • Enough. While I’m delighted you guys have met and engaged in a fascinating conversation, it’s veered far enough away from the topic of this blog that I’m calling a halt to it. If you want to continue it, you both have my email address, give me persmission to share yours with each other and we’ll let you communicate directly. Having said that, this exchange has no doubt done wonders for the Search Engine Optimization for this blog, so my thanks to you both.

            And seriously, this isn’t a comment on the import of the topic or the passion you both bring to it, it’s just that your dialogue is no longer on topic.
            Alan

        • Let’s concentrate on taking BABY STEPS towards a BALANCED BUDGET by the end of this decade. To wit –

          Gradually raise the retirement age to seventy.

          Projected Savings: Nearly 50 billion (Savings are not annual but working towards a balanced budget by decade’s end.)

          Use an alternate measure of inflation to calculate cost-of-living adjustments for Social Security recipients.

          Projected Savings: $23 billion

          BUT – ONLY IF: Include all new state and local government workers in Social Security. – This would ADD projected pay in to Soc Sec by a like amount.

          I’m absolutely loathe to do anything to current recipients but since I suspect my condition set above would never happen it’s a standoff.

          Enact the administration’s proposed weapons-systems cuts.
          Projected Savings: $4 billion

          Reverse the “Grow the Army” initiative.
          Projected Savings: $10 billion

          SPEED UP decline in engagement in Afghanistan UNLESS We’re willing to win this thing or just chug along in a state of permanent war. (GOOD GRIEF PICK A NUMBER – ANY NUMBER!)

          Restructure the military along strategic lines. – Projected savings of nearly $200 billion

          Institute medical-malpractice reform through the establishment of medical courts. Savings of $10 billion

          Cut the federal workforce by 5 percent. Over $25 billion in savings

          Delay NASA missions to the moon and Mars. Savings $4 billion plus

          Reform farm subsidies. Well over $10 billion

          Eliminate all earmarks. Nearly $20 billion

          On an annual basis:
          $37.6 billion – United States Department of Homeland Security??? Give me a break – we have OPEN BORDERS FOR GOD’S SAKE! I’d slash the heck out of this one!

          DOT? EASILY 10%! (AND FRANKLY THAT GOES FOR SEVERAL OTHERS ON THE LIST.)

          You reduce spending each year you therefore reduce the debt, reduce the debt reduce the amount it costs to service the debt – I’m not smart enough to come up with a figure on that one.

          I see you’ve got nearly $40 billion in Other Off-budget Discretionary Spending – Line item veto babeee! I’d go through that like a hot knife through warm butter.

          $145.2 billion(2008*) – Global War on Terror – Two words: No and way. I’d pass legislation that our spending in this area is not to exceed “X” percentage of our “global partners” in this effort. I’d be willing to bet you’d slash anywhere from 50 to 100 billion right there. OR: SLASH Homeland Security budget 100% and roll it into a max of $100 billion for this nonsense.

          As you can see I made an attempt to cut from all sides. First you gotta work towards a balanced budget and see where that gets you then go from there.

        • Alan, sorry too.

          The irony is that I thought Curt’s answer was great.

          Amazingly enough, I agree with almost all the suggestions he has made.

          And on this note, I shall bow out!

  4. http://articles.moneycentral.msn.com/Banking/BetterBanking/article.aspx?post=e1da5b68-6f22-4091-9ee8-df6712659b07

    Am I the only one who has noticed that whenever there is talk about tax breaks or tax break extensions there is a whole bunch of hand wringing and kvetching about the effect on the deficit yet in comparison there is really no corresponding angst when talking about our rampant spending? I mean folks say ‘oh yeah that’s bad’ …but then start spending the $$$ anyway… Check out the link above – there is a video and at the very end of the video the guy actually says we will need to rein in spending too if we’re going to fix what’s broken here.

    Sorry if I hijacked the post Alan – it’s just that I’m spending more time than ever thinking about when we’re going to actually start thinking in terms of spending instead of thinking in terms of taxing and how that shift in paradigms might actually start us down a better path as a country.

  5. I’ve spent my time looking at the ways the PPACA will affect my clients. Since I deal with middle class and have no upper income clients, I have not spent much time looking at the income tax implications of the legislation. Maybe that is not the best use of my time. However, I have not spent a lot of effort on the many changes to Medicaid, either.

    Thanks for the education. It is valid information to know but there is already enough in the PPACA for an insurance agent to dislike. I need to leave the tax questions to the accountants.

  6. Another clear explication of an incredibly complex topic. Thanks, Alan.

    You wrote:

    There’s a whole group of Americans who earn hundreds of thousands of dollars on investments, dividends and the like who avoid this tax yet benefit from Medicare. Imposing this tax on non-wage income is viewed as a way of making the tax system more fair.

    I wonder why the Democratic Party does not highlight this particular demographic more?

    It seems to me that the Republicans and the Tea Baggers are remarkably accomplished at rallying enmity for the so-called underclass “free riders”–those shiftless minions who allegedly contribute nothing to the public weal but nonetheless siphon the cream off the national teat.

    Are not elderly coupon-clippers, living off inherited wealth, getting their doctors bills paid for by Medicare but not paying anything into the Medicare system, just as onerous as the “Welfare Queens” (whose existence outside of Ronald Reagan’s doddering imagination remains perhaps a wee bit Apocryphal)? Might there be, in addition to the underclass “free riders,” an equally irritating-to-moral-sensibilities (and perhaps even more so) overclass of free riders?

    • Oh James – It sure would be nice if you would use the correct name for The Tea Party – I’m not a member but I sure think it’s wrong to use the “Tea Bagger” refrain. While I don’t agree with some of their take on what’s happening in this country I think they do make a great point about government going way beyond the parameters of what our Founding Fathers saw as government’s role.

      To use some made up slang term for folks who are taking an active and sincere interest in our country’s political system is as disingenuous as calling everyone who thinks guys like Jon Stewart, Stephen Colbert, and Keith Olbermann are the center of the universe leftists, pinkos and beatniks.

      Take it from a guy out here in California – it would DEFINITELY make this state a LOT better if we had some input from some opposing viewpoints. I hardly think Jerry Brown for the umpteenth time represents ‘real and meaningful’ change.

      • Point taken.

        I acknowledge a bit of spite there, Curt.

        Other than the use of Tea Bagger, however, I wonder what you think of my broader point.

        Are the (perhaps small handful of?) Americans who have managed to live their lives entirely off ofinherited dividends and investment income, none of which is currently taxed for Medicare purposes, just as undeserving (in your estimation) of Medicare benefits as those (no doubt more numerous) Americans who don’t pay much or any Medicare taxes either because they don’t work at all (or earn too little to contribute more than a pittance to the system)?

        My comment received a unanimity of thumbs down, which makes me suspect that many of the raters here are members of a “team” that define themselves, at least in part, by opposition to the “team” they (most likely correctly) perceive me to be on.

        • Hi James –

          I think that it’s bad to try and attempt focused legislation that affects one extreme or the other. What disturbs me most about what government (Both at state and federal level) is doing these days is trying to unearth every single pebble in search of new revenues. That just seems shortsighted and counter intuitive in a capitalist society. Am I bothered that some really rich guy who’s never seen a paycheck is getting some sort of undeserved tax break? Not really: He’s likely leaving a pretty big spending “wake”: He eats well, he buys clothing, he buys houses, he pays staff…he does a whole bunch of stuff I don’t do – he’s much more useful to this economy than I am! A guy like that isn’t saying “I’m going to New Jersey cause I don’t have to pay taxes on my clothes purchases at Brooks Brothers!” Nope – he just dashes down to Madison Ave and buys a tux and pays New York City and state taxes!

          Sorry but I am an absolute believer in the theory that holds the less you tax, the more people spend and the more money that flows into the economy through private spending the better. You know James – we are no longer a manufacturing country – in our economy we are very much dependent on wealthy folks gobbling up as much stuff as they can in the way of services. I just don’t see how it’s productive to take money out of private citizens’ hands and turn it over to the government who will then spend on some of the most ridiculous nonsense imaginable.

          To your other point: I don’t really see YOU as one team and ME as the other: I think Alan will tell you that the only teams I’m seeing these days is our State and Federal legislators VERSUS The American People! 🙂

          (Hey James – how can you not like the Tea Party? They’ve got the incredibly HOT Sarah Palin and a cute-as-a-button Bristol Palin who lights up the screen with her dance moves!) You may not like ’em but for us Republicans in California it sure comes as a welcome relief after months of Nancy Pelosi and Barbara Boxer commercials!!! I’d rather stare at Arlen Specter in a skirt!

  7. I’m curious as to whether the same tax would apply to a person who earned more than $250,000 in net rental income per year since that income is also considered unearned. My guess is that it would, am I correct?

    • Rick: I’d ask a tax professional, but for what it’s worth, my guess is that the applicability of the tax would depend on whether the rental income is part of a “trade or business” or a “passive” investment. If someone’s in the business of renting property and earns more than $200,000/$250,000 the rents would be captured on that side of the test. If it’s just an investment then it would be captured on the unearned income side of the test.

      And this is why I’m not an accountant.

  8. Yep – your Congress: Hard at work figuring out new and better ways to NOT lower the tax burden and accompanying spending but rather: Figuring out new and more creative approaches to add taxes.

    I guess the ONLY thing you can pray for anymore is deficit neutral. I simply can not recall one politician at the national level who ever actually committed themselves to figuring out how to lower spending and remove taxes. And by lower spending I mean take a red marker to existing fat in federal budget and line by line go through and eliminate that which isn’t worth spending the money on.

    Hey! That sounds just like one of them newfangled line item veto thingys!

      • I can’t help but notice that a Google ad that accompanied your link was for the following:

        Hoveround® Wheelchair
        9/10 People Had Medicare Pay for a New Electric Scooter! Free Info Kit

        When the most reliable voters in the nation are older, largely conservative in belief, preach a gospel of deficit reduction, and utterly unable to apply any of this to their own personal behavior, one makes me think we are as doomed as a society as any politician who tries to insert himself between a self-righteous old deficit hawk and his “free” Hoveround.

        How long before they start making those things with the kind of spokes that let that evil Roman guy nearly de-wheel Ben Hur’s chariot in their epic race?

        • You and I must be hanging around different seniors – the ones I see are fiscally conservative pay as you go types. I ‘d sooner trust them with my money than any legislator I can think of.

          I have ZERO problem with anything Seniors get through Medicare – in a day and age when just about every single state and local government is slashing senior centers, senior day care, senior benefits of all kinds out of their budgets, it’s these folks (and lots of kids) who are taking it right in the neck.

          Also – here on Veterans’ Day – it’s also worth noting that the Seniors I know EARNED their Hoverounds at places like Omaha Beach and islands that stretched from near Australia to Okinawa. I’m lucky to be allowed to breathe the same air as these guys.

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